Select Committee on Treasury Second Special Report


2. TRANSPARENCY: INCREASING CLARITY IN CREDIT CARD CHARGES:

Transparency and competition

Recommendation 6: While the UK credit card industry considers itself competitive, we feel that while consumers cannot properly compare products the level of competition is inadequate. We want to make it more competitive, by giving consumers clear information to choose between cards …… and we hope that providing consumers with clear and transparent information about what are necessarily complex products will become a priority.

2.1  The Government agrees with the Committee that competition is enhanced by the provision of better information to consumers. That is why one of the main drivers behind the package of proposals in the White Paper is improving transparency for consumers. The new regulations on the form and content of credit agreements will ensure that core information is given to consumers before they enter into an agreement, to enable them to compare products and select the one that is most appropriate for them. They will also comply with the requirements of the Distance Marketing of Consumer Financial Services Directive. Following on from this, credit agreements will have to show prominently above the borrower's signature all the main financial details and other key information, including the interest rate and the total charge for credit applicable to the individual consumer. Together, these provisions will ensure that transparency is greatly improved and that consumers will have full information about credit products before agreeing to sign up for them.

Summary Box

The need for a summary of key information

Recommendation 8: DTI's review of the regulations should place the principle of the Summary Box on a statutory footing.

2.2  We welcome the industry initiative to provide consumers with a Summary Box setting out the main features of credit card agreements. It provides a good basis on which to develop the format of our proposals on pre-contract information.

2.3  The Summary Box initiative covers pre-contract information about credit card agreements. The Government's proposals will extend to pre-contractual information for all regulated credit agreements and the content of credit agreements themselves, as detailed in the consultation paper published alongside the White Paper. We will require key information about credit agreements to be provided before the consumer enters into an agreement as well as upfront in the agreement itself. We intend to test out sample pre-contract information and illustrative agreements on consumers before reaching final decisions on the detailed regulations.

Information on monthly statements

Recommendation 14: We welcome the DTI's intention to explore with industry and consumer groups the scope for using the monthly statement to educate consumers about the implication of the debt they are taking on. This could include examples of how long the debt would take to repay for a given monthly payment.

Recommendation 36: Consumers need to be provided with clear information on statements showing that [only paying the minimum payment] will maximise the length of time needed to clear the debt and the amount of interest paid. Statements should show how long it would take for the debt to be paid off if only the minimum payments are made.

Recommendation 37: The minimum payment should always cover the interest on the outstanding balance (and any payment protection insurance premium) so that by making the minimum payment households should never be increasing the size of their debts.

2.4  The Committee is right to identify the need for consumers to be provided with clear and regular information during the course of their contracts.

2.5  As set out in the White Paper, we will be introducing a requirement to include on statements a warning about the implications of only making minimum payments on credit card debt. This will need primary legislation, which will be brought forward as soon as Parliamentary time is available. We are discussing with the industry what form such a warning might take and what scope there is for providing illustrations of various different repayment scenarios on statements. In the meantime, we are pleased that the industry has agreed voluntarily to add a warning to credit card statements.

2.6  APACS have advised us that there are no credit card lenders who set minimum payments below the amount of interest to be added to the account each month.

Annual Percentage Rates (APRs)

Recommendation 15: We were astonished to discover that the APR figure most commonly used by consumers to compare credit cards is allowed to be calculated in more than one way. This is clearly unacceptable, impedes competition and damages consumers' ability to compare products. The fact that such a situation has been able to persist for several years reflects badly on all participants.

Recommendation 16: The DTI, OFT and the industry should continue dialogue in an attempt to establish a commonly and legally acceptable working interpretation in advance of October 2004. This should be implemented as soon as possible. We welcome the Minister's commitment that the October 2004 deadline will not be missed, and that the work will be seen as a priority.

Recommendation 17: We believe the proposals in the White Paper to calculate the APR using the "go-to" or standard rate for purchases after any introductory period will provide a clearer and more understandable basis for consumers on which to compare cards than any blended rate.

2.7  The Consumer Credit White Paper re-affirmed the Government's commitment to achieve a single, consistent approach to the calculation of APRs.

2.8  A single set of assumptions for the APR used in advertisements - based on the standard "go-to" rate for purchases -was included in the consultation document published alongside the White Paper. A single calculation method will be brought into effect alongside revised Regulations on the advertising of consumer credit by October 2004.

2.9  While we understand the Committee's desire to see the credit industry and Government agree a common approach to the APR as soon as possible, changing to a single interpretation ahead of a substantive change in the law could call into question the legality of many thousands of existing agreements.

Interest calculation method

Recommendation 18: ….We welcome the DTI's intention to discuss with the industry ways in which interest calculation methods can be standardised and made more transparent without inhibiting competition. The DTI aims to conclude discussions by February 2004 and we will be looking for prompt action after that date has passed. The onus will be on the industry to prove that a measure of standardisation will not be beneficial.

2.10  The Government is concerned about consumers not knowing how interest is applied to their credit card account when this can have a great impact on the amount of interest that they pay. However, we also have concerns that any enforced standardisation of applying interest would stifle competition and product innovation. We are discussing how far the improved transparency for consumers - brought about by the APACS Summary Box and the Government's Form and Content proposals - deals with this interest application issue. Consideration is being given to setting down in regulations a requirement that the information which currently appears in Summary Boxes concerning how each lender calculates its interest charges must be clearly explained in the pre-contract information and also in agreements.

Risk-based pricing

Recommendation 19: Risk-based pricing is a practice which raises serious transparency issues, as consumers are often unaware of the rate they will be charged until after the card has been received. This is an unacceptable practice. We are also concerned that the very act of shopping around by applying for several different cards can damage a consumer's credit rating. The OFT should monitor the proportion of customers who obtain the favourable rates advertised and those who end up on the higher rates. It should ensure that a system is put in place to prevent consumers being misled.

Recommendation 20: Where a range of products is offered, consumers should not be offered a more expensive product without clear, written reasons. We believe the issuer should also be required to obtain a positive acceptance from the consumer before issuing a card. Exclusions that apply to cards, such as minimum ages or annual incomes should be clearly advertised in the marketing literature.

Recommendation 21: Consumers offered less favourable terms than the typical APR should be provided with a free copy of their credit reference by the lender. The regulators and the industry should develop a strategy for promoting awareness and a sense of ownership amongst consumers of credit references and the factors that affect their credit score. Consumers should be actively encouraged to provide the firm with positive information to reduce the rate charged. Firms should also share both positive and negative data with the credit reference agencies.

2.11  The amended Regulations on the form and content of credit agreements will require lenders to include in the credit agreement the precise interest rate the consumer will have to pay. The consumer will have to agree to that specific rate before the contract comes into being. Consumers will, therefore, always know their allocated rate of interest before entering into a credit agreement and will have had to show their acceptance of that specific rate if the account is to go live. In addition, the new Regulations on advertising will require that any advertised typical interest rate must be available to at least 66% of borrowers. All advertisements will have to be clear, fair and not misleading. Where consumers are declined an advertised rate, we consider it good practice for lenders to explain why their lower rate was not given.

2.12  There may be a number of reasons for offering a consumer less favourable terms than the typical APR, which may not necessarily relate to the credit reference agency record. Moreover, the lender does not (and is not entitled to) receive a record in the form that it is held by the credit reference agency. It is therefore likely to be more helpful for consumers to receive an explanation of the decision from the lender than a copy of the information received by the lender from the credit reference agency. Consumers can themselves get full copies of the credit records from the agencies for a fee of £2.

2.13  We are pleased to note that from April 2004 lenders will be able to link their systems into new software that all three credit reference agencies will offer. This will make it possible for lenders to make the checks necessary to offer the customer a quotation for the amount and cost of credit without that appearing as an "application footprint" on the consumer's credit record. Only when the consumer decides to make an application on the basis of the quotation will a footprint be left. This will mean that consumers can shop around without it damaging their credit rating.

2.14  DTI's Task Force on Over-indebtedness, which ran from October 2000 to Autumn 2002, recommended that lenders should share positive as well as negative data through credit reference agencies. We will be monitoring progress on this and other recommendations through the new cross-Government machinery outlined in the White Paper.


Transaction / Penalty charges

Transparency

Recommendation 23: Consumers need to be aware of the extent and the exact amount of any possible transaction charge or penalty fee.

2.15  The Government agrees that any charges that may be made should be made clear to the consumer. Lenders will be required to state the level of any charges payable by the consumer under the credit agreement. Where the amount of the charge cannot be stated at the outset, the lender will have to state the precise methodology that will be used in determining them. Consumers already have a degree of protection against unfair charges under the Unfair Terms in Consumer Contracts Regulations. We note that such transaction and default charges are a key feature of the Summary Box

The level of fees charged

Recommendation 24: To reassure us and the general public we call on all lenders to place information on the amounts raised from penalty fees and the costs involved in the public domain. The DTI should investigate this issue.

2.16  OFT is investigating whether the charges made by lenders and how the levels relate to the actual costs to the lenders of the consumer behaviour in question are consistent with the requirements of the Unfair Terms in Consumer Contracts Regulations. We will consider in the light of the outcome of that investigation whether any further action is needed.

Promotional rates

Recommendation 26: Both the OFT and the DTI, in its review, need to address the regulatory aspects governing … products [which encourage consumers to get into more debt in order to take advantage of special offers] and their promotion.

2.17  The Government notes that OFT took action over the criticised Barclays "0% forever" product offer which it regarded as misleading. While DTI recognises that, on occasions, special offers can be advantageous to consumers, the proposed Regulations on advertising and agreements will require lenders to be more transparent in how these are presented. Lenders will still be able to advertise special offers, but they will have to provide clear information about other aspects of the card. The principal rate quoted in all advertisements will be the APR based on the standard rate for purchases.


 
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Prepared 16 March 2004